Stamford among cities reaping windfall from loan program

Rob Varnon, Staff Writer

Published
9:38 pm EST, Saturday, January 8, 2011

At the height of the recession, pension plan managers for four Connecticut municipalities -- Bridgeport, Stamford, Milford and Bristol -- hit upon a novel way to make money: Borrow hundreds of millions of dollars from a low-cost federal emergency loan program designed to kick-start the economy, then turn around and invest it.

So they did, to the tune of $436 million, plowing the money into a variety of bundled securities of car loans, credit cards and student loans.

So far, the pension plans are enjoying very solid returns -- 22 percent in Milford's case.

The four Connecticut municipal pension funds, along with two California state pension funds, appear to be among the few, if not the only, government entities to borrow directly from the Federal Reserve fund.

One independent investment adviser said the program, while it carried some risks, now appears to have been virtually a "free lunch" for the municipal investors.

The Fed's Term Asset-Backed Security Loan Facility, which ran from March 2009 to January 2010, was set up at a time when the credit markets were struggling. The TALF program was one of several designed to provide the private sector with enough capital to keep the economy from sinking even deeper into a recession.

With a small initial buy-in, investors could borrow funds at 1 to 3 percent interest rates. Then, they would buy packaged loan instruments that offered stronger returns. Until the loan is paid off, the investments are held as collateral for the loans.

These days, state and muncipal pension funds are struggling to reap healthy investment returns to meet their obligations to retirees. The TALF deals illustrate the extent to which pension plans now make aggressive -- and sometimes risky -- investments that would have been unheard of a few decades ago.

The Connecticut pension funds, which had to pass eligibility requirements set by the Fed, took the loans in a series of offerings. Milford tapped TALF nine times, Bridgeport eight and Stamford six. The pension funds must pay the money back within three years of borrowing it.

In December, the Federal Reserve revealed the names of institutions that used several of its emergency funding programs, including TALF. Virtually all of the more than 2,000 loans made under TALF went to such financial industry giants as Black Rock, FrontPoint, Morgan Stanley and Oppenheimer. Other pension funds might be connected to TALF loans through investments in mutual funds.

Susan Mangiero, an expert in risk management and a valuation expert at Trumbull-based Fiduciary Leadership LLC, equated the Connecticut pension funds' TALF deals as getting to "eat a free lunch."

"I normally would have been very nervous about the valuation, but it seems like the government took away some of the risk," she said.

To minimize risks, the TALF program required that securities purchased by loan recipients carry AAA rankings from two rating services.

Nonetheless, a Government Accountability Office report on the TALF program questioned whether the Federal Reserve and Treasury were assuming too much risk and putting too much public money on the hook for the program. The GAO expressed concerns about the outstanding balance of loans and whether the program's collateral-to-loan requirement was sufficient.

Mangiero said that while she has not fully reviewed the program, on the surface it appears to be paying off for a lot of investors, similar to the way investors who jumped into the stock market after the crash in 2008 are now reaping large gains.

The Milford fund has reaped a 22 percent return on its investments thus far, said Mayor James L. Richetelli Jr. The pension plan put up a cash collateral for the loan, the mayor said.

"It was a good investment," he said Thursday.

The men behind the Connecticut pension fund investments say they have worked out well for all involved and have helped stimulate economic activity.

John Beirne is director of investment at the Beirne Group Merrill Lynch and a consultant who advises the municipal funds. Brian Gevry is chief investment officer and chief executive officer of Boyd Watterston, the company that made the TALF investments for them.

"The story here is that four municipalities came to the rescue of the U.S. economy," Beirne said, noting that their investments helped to loosen up credit markets.

"The investments are going very well," agreed Gevry, who would not disclose returns other than to say the investments should turn a "double-digit" profit. "The returns have been terrific."

He said he brought the idea directly to the pension funds instead of having them join a larger fund, because he didn't want to dilute the return on what might be a once-in-a-lifetime opportunity.

One potential risk for TALF borrowers is that the maturity date of the TALF loans -- when they have to be paid off -- would come up faster than the maturity dates on the securities purchased by the investors.

But Gevry said the majority of investments are maturing in time to meet the payback conditions of the TALF loans. He said there are some student loan-backed securities that will have to be sold before their maturity date to meet the TALF payback obligation.

The process for paying back the loans is automated, he said, with a portion of the returns going to the Fed.

So far, Bridgeport has paid back $15 million of the $105 million it borrowed; Milford has paid back $17.7 million of the $162 million it borrowed; and Stamford has paid back $12.4 million of the $63.3 million it borrowed. Bristol borrowed more than $100 million and has also paid back some of what it has taken.

The Connecticut pension funds were able to tap into TALF because they could move quickly, but they didn't skip any legal due diligence, one official said.

In Stamford, Assistant Fire Chief Peter Brown, who sits on the Stamford Firemen's Pension Fund committee, said the fund ran the proposal by lawyers to make sure it legally could participate.

Bridgeport Mayor Bill Finch's administration was not able to provide an official for comment about the city's investment.